Jim Sinclair: The Rising Interest Rates Will Not Be A Consequence Of The Anticipated Rate Of Inflation, As Is Normally The Case, But Will Be The Result Of The Increasing Risks And Poor Market Conditions Such As Illiquidity.

This article is extremely positive for the price gold and silver but you must take your time, reading it carefully therefore understanding it. GG, I and BH do and this must be studied so you will also see the new world we have fallen into. Dante would be proud

Since there is no precedent for economic conditions globally today few if any outside of GG and we understand how to converging circumstances are bullish for gold and very bullish for silver. Globalism may have bitten the dust but the impact of this experiment is going to be with us for a generation. The reset is coming but not by central bank decision. It is coming because we have exterminated all markets with techies running the show.

You must grasp the awful pickle that pensions and insurance companies are in to add to all the others back story dollar negatives there are from outrageous OTC counter party commitments to the size of all debt. Brevet is done This could be three strikes and the EU is out for all practical purposes.

Gundlach believes that Trump’s policies can raise the bond yields to 6% in the next 4 to 5 years. I believe that the recent surge in interest rates worldwide, with global bonds posting the biggest two-week loss ($1.8trn) in 26 years (since 1990) as President-elect Donald Trump sent inflation expectations surging, will rise above 3% before the end of 2016. Why? Because investors, mainly the hedge funds, and not so much the life insurance and pension companies that often hold their bonds until maturity, must get wary that the 10y Treasury Yield might break the 2.5% (we have already reached the 2.40% level on Wednesday November 23) and subsequently the very important 3% – see below.

Since 1981 when Volcker raised the Fed Funds Rate from 11.2% in 1979 to 20% in June of 1981, interest rates have been trending downward. Consequently, when the yield rises above the 3% level it breaks the declining range which has been intact for the last 35 years. Subsequently with the tremendous illiquidity in the market, caused by the Central Bankers and new regulations, we could very quickly see yields of 4%, 5%…and even 6%. The 35-year break out will not be gradual…as that is the nature of patterns breaking out of long-term trends.

Do you think investors want to stay in the bond market with the Italian NO vote on December 4? This is almost a certainty with all its potential unwanted consequences of breaking up the EU and much higher Italian interest rates with as first culprit the Italian retail investors (bail-ins) and huge losses for the French banks on their Italian bond positions. International banks have lent Italian banks €550bn of which €250bn was lent by the French banks. This could force worldwide bond CDS (Credit Default Swaps) and interest rates much higher. Everybody will go for the gates because breakouts of long-term (35 year) ranges are very violent and extreme. Consequently, funds don’t want to incur even bigger losses before the end of the year and annihilate bonuses or what is left of them. On top of that we have the Fed meeting on December 13-14 with an almost 100% certainty that the Fed Funds Rate will be raised.

In my opinion the rising interest rates will not be a consequence of the anticipated rate of inflation (stemming from the low base effect of commodities), as is normally the case, but will be the result of the increasing risks (the status is changing everywhere) and poor market conditions such as illiquidity.

Debt levels have increased by 47% from $150trn in 2008 to $220trn in 2016!!

Despite the low interest rates and the subsequent underfunding of the pension plans, global debt levels have increased significantly since 2008. Debt across the nonfinancial sectors of almost every economy remains close to record highs, meaning that the potential for negative wealth effects in the real economy is very much there. Whilst world GDP has increased by 16% from $63trn in 2008 to $73trn in 2015 according to figures of the World Bank the overall global debt has increased by 47% from $150trn in 2008 to $220trn+ in 2016. A threefold increase compared to the increase in GDP. The following chart shows how global debt has increased from 2000 to 2014.

As we know loans or debt bring forward future income because future income needs to be used to repay the capital sum and the interest charges and thus future GDP forecast will be lower with ever increasing debt levels. This will mean that ultimately a huge capital destruction will take place because valuations will come crashing down following the reduced ability to consume which will lead to much lower price earnings ratios. It will be a self-feeding dynamic. And this will result in the debouchment of the currencies leading to less and less global purchasing power! Don’t forget the currency is ultimately the benchmark of your (global) wealth. And therefore when currencies are debouched, as we witnessed with the Brexit and the subsequent flash crash in the UK, it is important to maintain purchasing power by buying physical gold and silver. Gold and silver are valued in all currencies and thus when one currency undergoes a devaluation gold and silver keep their value in other currencies unless that currency is the reserve currency, the US dollar. Just also look at India where the abolishment of the Rupee 500 ($7.5) and 1,000 ($15) notes, which are no longer legal tender, saw gold exceeding $2,000/oz. or 50,000 rupees per 10 grams of gold ($1=R68.5056). Another clear example of how the value of paper money that can be manipulated and declared worthless and the rise of the value of the ultimate currencies gold and silver that have value on their own. N’importe quai what politicians determine gold and silver will never lose their value. Ever wondered why so many Central Banks have a large part of their forex reserves in gold?

Anyway the following example will illustrate the diminishing returns of the incumbent US economy and the additional loans that are needed to create decreasing incremental value in GDP. According to the latest BEA (Bureau of Economic Analysis) revision, the nominal annualized Q1 GDP in the US was $18.23 trillion (according to the World Bank 2015 global GDP was $73trn), an increase of just $65 billion from the previous quarter or an annualized 0.7% rate; the question is how much credit had to be created to generate this growth. Well, according to the Z.1 (Fed, Financial Accounts of the United States – Z.1), total credit rose increased by $645 billion to a new record high $64.1 trillion. It means that in 1Q2016, $10 in new debt was needed to generate just $1 in new economic growth (see below)! Basically these figures show the inefficiency of the incumbent economic system with an infrastructure that desperately needs a complete overhaul, lower taxes and fewer regulations that prohibit the creation of new businesses. Though it is like spaghetti software whereby new software is added to existing software, which becomes a change on changes often typified as spaghetti software. One needs a “clean sheet” to really realize the efficiencies of a new beginning. Though this virtually impossible and history shows us that we first have to go through a period of “creative destruction” before we can fully realize the potential of our investments.